Question 1

A cash-basis taxpayer loans $100,000 to their 100% owned accrual-basis corporation. The note requires interest to be paid annually. The corporation accrues the interest expense in Year 1 but does not pay it until Year 2. When can the corporation deduct the interest?

Accepted Answer

Apply §267(a)(2) Matching Rule. An accrual basis payer cannot deduct an expense to a related cash basis payee until the payee includes it in income (Year 2).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Applying standard accrual rules.

A cash-basis taxpayer loans $100,000 to their 100% owned accrual-basis corporation. The note requires interest to be paid annually. The corporation accrues the interest expense in Year 1 but does not pay it until Year 2. When can the corporation deduct the interest?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 3

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